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Steepest Rate Cut in 11 Years to Revive China's Economy

China eases monetary supply with deep cuts in lending rate and reserve ratio.

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On Nov. 26, China slashed its benchmark one-year lending and deposit rates by 108 basis points to 5.58% and 2.52%, respectively. The rate cut came sooner than many had expected, as the market was not anticipating another cut until December or early 2009 given the three rate reductions since September. Moreover, the cut ranks as the most aggressive in more than a decade, indicating the government's belief that a drastic (rather than gradual) easing of the monetary supply is required to rescue the slowing economy.

On the same day, China also announced that effective Dec. 5, it will lower the reserve requirement to 16% for its largest banks and 14% for its small and medium-sized banks. Some rough estimates show that the reserve ratio cut will be equivalent to releasing hundreds of billions of Chinese currency into the money market, helping to lower the funding cost for banks.

Dan Su does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.